The ranks of homeless people on welfare in San Francisco shrank 84 percent over the last 18 months through the city's Care Not Cash program, and by next May, there should be no homeless people left on the rolls at all, Mayor Gavin Newsom announced Tuesday in his second annual State of Homelessness address.

The best news about that development, he told a cheering crowd of city workers, homeless people and social service providers, is that about half of the 2,106 homeless people who left welfare -- 1,101 of them to be precise -- are now living in newly created housing, Newsom said.

And at a time when crucial federal funding for housing and other social programs is either being cut or put in danger of cuts, that's "not bad," he said.

"I remember my critics saying there is no way there will be a decline in (welfare) rolls with Care Not Cash," Newsom said. "Well, now that's 84 percent. ... We've done a very good job with that program."

The voter-approved Care Not Cash overcame court challenges and premiered in May 2004, when 2,497 homeless people were receiving monthly welfare checks of as much as $410. Those checks are cut to $59 under the program, and the homeless are offered housing or shelter instead -- partially paid for by the money cut from the individual's welfare check. Today, there are just 391 homeless people left on the rolls. The rest were moved into housing or emergency shelter or left the program altogether.

There are still challenges, Newsom said -- notably, complaints by some that $59 is not enough to live on. But he said he hopes any hardships imposed by the small checks will be eased by the city's expanding array of services for the homeless, from food stamps and job training to mental counseling.

The welfare-to-housing program was just one of several Newsom cited as signs of progress over the past year on the homelessness crisis, which he said he still considers his No. 1 priority. Among those were:

-- Project Homeless Connect grew from a small gathering of city workers volunteering to help the homeless for a day to a bimonthly affair drawing more than a thousand volunteers from all over the Bay Area. To date, 13,114 have helped 8,256 homeless people into housing or services -- and this month, the program was adopted by 31 cities around the country.

-- San Francisco this year got $1 million more in federal homelessness funding than last year, in the annual McKinney-Vento Grant awards announced Tuesday. The city received $17.3 million, and was the only city in the country to be awarded all it asked for.

-- The city outreach counseling team, created by Newsom shortly after he took office, has been expanded from 12 to 23.

-- Some 1,855 units of housing for the homeless have been created since early 2004, putting the city far ahead of pace for the 3,000 called for in its 10-Year Plan to Abolish Chronic Homelessness, drawn up a year ago by a committee led by former Supervisor Angela Alioto. Another 632 units are expected by April.

-- Half of the 300 women in emergency shelters have been moved into supportive housing.

-- More than half of the 320 senior citizens in emergency shelters have been moved into supportive housing, and many of those still in shelters said they didn't want to move.

-- The Homeward Bound program offering one-way bus tickets home for homeless people, if someone on the other end is happy to take them, has served 887 people since being created last spring.

Looking ahead, Newsom said he wants to create a medical respite center with at least 75 beds for ill homeless people, more services and housing for families and more housing in general for the homeless. Care Not Cash has pumped millions of dollars into housing as money was converted from welfare checks, but that stream is reaching its maximum.

"We can solve homelessness. We must solve homelessness," he told the crowd of 150 in the city Health Department building. "There is no greater issue in the city and county of San Francisco."

Some homeless people and their advocates praised the speech; others were skeptical.